1963-VIL-44-P&H-DT

Equivalent Citation: [1964] 52 ITR 410 (Pun)

PUNJAB AND HARYANA HIGH COURT

Income-Tax Reference No 22 of 1960

Dated: 08.08.1963

NANAK CHAND MAMRAJ MAL

Vs

COMMISSIONER OF INCOME-TAX, SIMLA

D. C. Gupta with J. V. Gupta, for the assessee

D. N. Awasthy with H. R. Mahajan, for the Commissioner

Bench

Dulat C.J. (AG.) and Pandit J.

JUDGMENT

Dulat, ACTG. C.J.

This is a reference under section 66(2) of the Indian Income-tax Act, 1922.

The assessee, Firm Nanak Chand Mamraj Mal of Hansi, is a Hindu undivided family and the year of assessment is 1949-50, the relevant accounting year being Samvat year 2005 which roughly corresponds to 1948-49. The assessee has been doing money-lending business on a large scale since long. Most of this business was being done through another firm called Messrs. Johrimal Sanhilal of Delhi. The assessee was sending money to Messrs. Johrimal Sanhilal and that firm advancing it to various debtors on behalf of the assessee. During the year 1936-37, Messrs. Johrimal Sanhilal suffered considerable financial set-back and in the beginning of 1937 the assessee made an application in the insolvency court for the adjudication of Messrs. Johrimal Sanhilal as insolvent. That application succeeded and in 1938 Messrs. Johrimal Sanhilal were adjudged insolvent. The main creditor was the assessee. These insolvency proceedings through an official receiver went on from 1938 till 1950 at any rate. In 1941 a dividend was paid by the official receiver to the creditors and in that connection the assessee received a sum of over Rs 13,000. No further amount was received by the assessee from the official receiver till 1950, when, as a result of certain litigation, which had been pending for some time and which finally ended in favour of the official receiver, another sum of Rs 2,195 was received by the assessee, this being in August, 1950. Before then, however, and for the assessment year 1949-50 the assessee claimed that the amount due from Messrs. Johrimal Sanhilal had become irrecoverable during the accounting period and the assessee was entitled to adjust it against the income. The amount claimed as irrecoverable was said to be a little over Rs 1,00,000. The Income-tax Officer considered the claim but was not satisfied either that the money advanced to Johrimal Sanhilal was a loan in the ordinary course of business or that it had become irrecoverable during the relevant accounting year, his view being that the debt had become irrecoverable long before the year 1948-49 and should have been written off immediately after the debtor-firm was declared insolvent in 1938 or, at the latest, when the first dividend was paid in 1941-42. The assessee appealed against that decision. The Appellate Assistant Commissioner held on the first question that the debt had in fact been advanced to the insolvent-firm in the ordinary course of business. On the second question the Appellate Assistant Commissioner did not accept the view of the Income-tax Officer that the debt had become irrecoverable long before the accounting year as, in his opinion, neither the fact of insolvency in 1938-39 nor the payment of the first dividend could determine the question of irrecoverability. He relied, on the other hand, on a letter received from the official receiver in March, 1949, in reply to an enquiry by the assessee, the receiver stating that it was hardly possible to say whether any further sum would or would not be paid to the creditors of the insolvent till after the pending litigation was finally decided. On the basis of this communication the Appellate Assistant Commissioner held that even in March, 1949, the debt had not become irrecoverable and that till the litigation was decided it was impossible to say that no further assets of the insolvent were available for the creditors. He, therefore, came to the conclusion that as a matter of fact the debt was not irrecoverable even up to the end of the relevant accounting year and the assessee was, therefore, not entitled to have it adjusted during the assessment year 1949-50. The Appellate Assistant Commissioner held that the balance of the debt due from the insolvent firm was a little under Rs 1,00,000, being, according to proper calculation, Rs 99,358. Against the decision of the Appellate Assistant Commissioner, the assessee appealed and so did the Income-tax Officer. There was no dispute before the Income-tax Appellate Tribunal regarding the amount of the bad debt. The only question argued was whether the debt had become irrecoverable during the relevant accounting year. The Income-tax Appellate Tribunal found that it had not, but, while so doing, the Tribunal did not accept the view of the Appellate Assistant Commissioner that even up to the end of the accounting year the debt had not become irrecoverable. On the other hand, the Tribunal found that the debt had become irrecoverable soon after the year 1941, the reason, according to the Tribunal, being that subsequent to the payment of the first dividend in 1941 there was no visible asset belonging to the insolvent except a sum of Rs 10,000 regarding which there was a dispute between the Punjab National Bank Limited and the official receiver, and that whichever way the dispute was settled the assessee could never hope to receive more than Rs 2,500. The Tribunal was thus of the opinion that apart from this possible sum of Rs 2,500 there was nothing else which the assessee could legitimately hope to recover from the insolvent after the year 1941 and from this concluded that the bulk of the debt had become irrecoverable soon after 1941 and, in any case, long before the relevant accounting year 1948-49. On these conclusions, the Income-tax Appellate Tribunal dismissed the assessee's appeal, while it allowed the Income-tax Officer's appeal in the sense that it accepted his view as against the Appellate Assistant Commissioner's view regarding the time when the debt became irrecoverable. The assessee then asked the Appellate Tribunal that the question of law arising in the case should be drawn up for the High Court's decision but the Tribunal held that no question of law arose in the case. That led to an application in this court on behalf of the assessee and this court was persuaded that a question of law did arise in the case, the question being whether the finding of the Tribunal that the debt had become irrecoverable long before the relevant accounting year was based on any material at all. Hence, the present reference, the actual question for decision before us being:

"Whether there is any material on the file to justify the finding of the Tribunal that the debt became irrecoverable long before the year in question?"

Mr. Gupta admits that when an assessee claims adjustment of a bad debt he has to prove--(1) that the debt has become irrecoverable and (2) that it became irrecoverable during the relevant accounting period--and also admits that both these are questions of fact. Mr. Gupta does not before us dispute the conclusion of the income-tax authorities that the assessee has not been able to show that the debt in dispute became irrecoverable during the relevant accounting year. He admits, in fact, that had the Income-tax Appellate Tribunal accepted the view adopted by the Appellate Assistant Commissioner, he would probably have been satisfied and no reference to this court would have been necessary. His grievance now is against the finding of the Appellate Tribunal that the debt in question had become irrecoverable long before the accounting year 1948-49 and although, as I have mentioned, Mr. Gupta admits that this is essentially a question of fact, his submission is that in law the finding of fact cannot stand unless there be some material on the record to support it and in the present case, according to learned counsel, there is none. To put it another way, Mr. Gupta is for the purpose of the present case satisfied with the view of the Appellate Assistant Commissioner that the disputed debt had not become irrecoverable during the relevant accounting period and had in fact not become irrecoverable even till the end of that period, the implication being that it might be found irrecoverable at some later time. His grievance thus is against the conclusion of the Tribunal reversing the view of the Appellate Assistant Commissioner and holding that the disputed debt became irrecoverable long before 1948-49, which conclusion will, of course, prevent the assessee from claiming adjustment at any future time.

To appreciate Mr. Gupta's argument in support of the submission that there is no material to justify the finding of the Appellate Tribunal, it is useful to understand what is meant by saying that a debt has become irrecoverable at a particular point of time. In B.C.G.A. (Punjab) Limited v. Commissioner of Income-tax [1937] 5 I.T.R. 279, 307) Din Mohammad J., speaking on behalf of a Bench of three learned judges of the Lahore High Court, expressed this matter thus:

"So long as there is any ray of hope left to recover a debt, however dim it may be, and so long as a debt is in the process of realisation it cannot be said that it has become irrecoverable."

Mr. Awasthy does not seriously dispute the correctness of this view but he urges that the question being largely one of fact, it will depend in each case on the circumstances of that case whether there was any ray of hope left at a particular time for the recovery of a debt. The point of the observation of the Lahore High Court, however, is that before anyone can reasonably say that a debt has become irrecoverable, there should at that point of time be no hope left for the recovery of that debt. In the present case the Tribunal has indeed observed that subsequent to 1941, "the assessee knew for a certainty that the maximum recovery that he could ever hope for would not exceed Rs 2,500 apart from the first dividend which had already been received from the official receiver "and then said:

"It is clear, therefore, that the assessee lost all hope of recovering the debt in question except to the extent of about Rs 2,500 long before the relevant year of account."

It is these observations which, according to Mr. Gupta, are unsupported by any material on the record, and the submission is that the mere fact that there was an order of insolvency against the debtor in 1938 or the fact that only a dividend of about Rs 13,000 was paid in 1941, and then for many years there was no payment, cannot in any manner lead to the conclusion that nothing could be hoped for by way of recovery subsequent to the year 1941. The Tribunal appears to have thought that because the assessee in fact recovered nothing except a sum of a little over Rs 2,000 in August, 1950, it was reasonable to think that soon after 1941, the assessee knew that nothing more would in fact be realised. This, in my opinion, is to reason on the basis of facts which came to light much later than the time in respect of which the state of mind of the assessee is being judged. Nor is there, in my opinion, any material to support the observation of the assessee that soon after 1941, the assessee knew or could have known for a certainty that nothing more would be recovered from the debtor except perhaps Rs 2,500. This is largely a conjecture without even considering the nature of the insolvency proceedings. Much more reasonable seems the submission of Mr. Gupta, which is supported by the observation of Din Mohammad J. in B.C.G.A. (Punjab) Ltd. v. Commissioner of Income-tax[1937] 5 I.T.R. 279), that as long as a debt is actually in the process of realisation it cannot be said that it has become irrecoverable. The question actually before the Lahore High Court was very similar to the question in the present case as there also the debtor had been adjudged insolvent and his estate was being wound up and the view taken was that during the actual process of the winding up it was hardly possible to say that a part of the debt had become irrecoverable. Very similar was the view expressed by a Division Bench of the Lahore High Court in a later case, Deoki Nandan and Sons v. Commissioner of Income-tax [1941] 9 I.T.R. 202, 209), where Dalip Singh J. said:

"In the circumstances, it seems to me that the only date on which it can be said on the material on the record that the debt became finally a bad debt would be the 11th June, 1936, when the official receiver declared a final dividend and stated that no more was to be expected by the creditors."

It is quite true, as Mr. Awasthy points out, that that was a finding in the circumstances of that particular case but that does not take away from the force of the general observation that in a case where the debtor's estate is in the hands of a receiver in insolvency, it is rarely possible to hold a debt irrecoverable until after the official receiver has more or less done with the estate. No case has been brought to our notice expressing a different view. Mr. Awasthy referred to an earlier decision of the Bombay High Court in Vallabhdas Murlidhar v. Commissioner of Income-tax [1929] 4 I.T.C. 318) but in that case the debt was held to be recoverable after the insolvency proceedings had ended and the insolvent had been discharged, while the assessee was claiming that the debt became irrecoverable a long time after the discharge of the insolvent. That decision, therefore, does not really express any different opinion. It is unnecessary to go into other cases because the general proposition is accepted by Mr. Awasthy that a debt becomes irrecoverable at that point of time when there is, really speaking, no hope of its recovery left. The Tribunal has concluded in the present case that this happened soon after 1941, because there was in the opinion of the Tribunal no hope of recovery of anything more than about Rs 2,500 after 1941. This finding, although one of fact, is not supported by any material on the record and in fact the evidence, as it is, points to the other way, for even in March, 1949, the official receiver was of the view, and he wrote in that connection to the assessee, that it was not possible at that stage to say whether any more money would be recoverable from the estate of the insolvent or not. As far as I can see, therefore, the conclusion of the Income-tax Appellate Tribunal that the disputed debt had become irrecoverable long before the beginning of the relevant accounting year, is not justified by any material on the record, and I would, therefore, answer the question referred to us in the negative. In all these circumstances, however, I would leave the parties to their own costs of the reference.

I agree.